CONFERENCE OF FINANCE MINISTERS ON THE ESTABLISHMENT OF AN AFRICAN DEVELOPMENT BANK
held at the Sudanese Parliament House, Khartoum, on Saturday, 20 July 1963, at 9.30 a.m.
Chairman: Mr. M. BEHEIRY (Sudan).
CONTENTS:
Discussion of Articles 14, 15,16,17,19 and 20 of the Draft Agreement Establishing an African Development Bank,
DISCUSSIONS OF ARTICLES 14, 15, 16, 17, 19 AND 20 OF THE DRAFT AGREEMENT ESTABLISHING AN AFRICAN DEVELOPMENT BANK.
Mr. MUKASA-SSENTONGO (Uganda) supp-orted the Nigerian amendment at the previous meeting on the question of the Pank's investing in equity capital.
Mr. MANGASHA (Ethiopia) opposed the amendment.
Mr. ATTIGA (Libya) felt that while African c:nterprcneurs should be encouraged, the impli-cations of inve,tment in equity should be thoroughly considered. There was a problem of control. In the International Finance Corporation (IFC) the question had been postponed for eight years; in 1960 its Board of Governors had allowed invest-ment in equity but without voting power.
Mr. RAMPARANY (Madagascar) felt that the Bank should be able to invest in equity capital;
the l'oard of Governors should decide on the con-ditions of participation in each case. Articles 14 and 15 covered the question adequately.
Mr. KWATENG (Ghana) thought that in view of the lack of capital markets in Africa, some safe~
guard was required in case the Bank was unable eventually to dispose of its shares.
Mr. AHMED (Sudan) suggested there should be a general stipulation that the Bank could, if necessary, intervene in the administration of the project concerned.
Mr. MORGAN (Liberia) felt that the matter should be left to the discretion of the Bank's man-agement.
Mr. MOALLA (Tunisia) commented that under Article 15 it would seem that the Bank could not use borrowed funds for equity investment, only its own capital and reserves.
Mr. ATTIGA (Libya) said that Article 15 did not prevent substantial control. The question was how much control? If the countries concerned treated Bank funds as foreign capital, the Bank would not be able simply to take over control of national com-panies.
Mr. AKINRELE (Nigeria) stressed that his delegation did not mean to preclude the Bank from investing in equity capital; its aim was to insulate it from political pressure.
Mr. MARZOUK (United Arab Republic) said that had the Bank been a national develop-ment bank, his delegation would have advocated abandoning the two normal limitations on parti-cipation in equity capital so as to enable it to have a controlling interest. But since it was an in·
ternational institution these must be no risk to its reputation. However, exceptional circumstances might arise involving a development bank in a small country. He proposed that as a rule such
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lion should be a voided because of the difficulties involved in case of liquidation, etc., but that in exceptional circumstances, with a three-quarters majority, it should be admissible.
Mr. MANGASHA (Ethiopia) felt that the Con-ference-mostly composed of Government officials was in danger of being biassed against private un~
dertakings. There had been more failures in Govern-ment undertakings than in private ones. He pointed out, with respect to Ghana's point, that the existence of a stock exchange did not mean that the value of shares was necessarily maintained. The Bank should not be restricted to public investment.
Mr. MOALLA (Tunisia) wished it to be made clear whether the Bank could invest borrowed funds (referred to in Article 14 (I) (b)) in equity capital, in view of Article 15 (4). This would be a dangerous proceeding and might prejudice its credit worthiness.
Mr. AHMED (Sudan) explained that the Bank should be able to intervene, not to the extent of taking over an undertaking, but by sending represen-tatives to discuss the position. As to the Libyan point, he thought that, actually though not legally, the Bank would not really be regarded as a foreign institution.
Mr. NGANDO-BLACK (Cameroun) expressed the view that borrowed funds could be used pro-vided this was done under conditions of normal banking practice.
Mr. MOALLA (Tunisia) said that he thought that the Committee of Nine had intended Bank guarantees to cover both loans and investments, although the latter was a more difficult matter.
Mr. ELKIN (Secretariat), dealing with points raised by Libya and Cameroun, said that the status of the Bank, when investing in equity in a member country, would not be that of a domestic share-holder; it would be subject to any national legisla-tion regarding foreign investment and to internalegisla-tional agreement and international law, including that relating to non-discrimination. The difficulty could be dealt with either by an international protocol under which the member States gave the Bank a special position, or by agreement embodied in national legislation in each particular case. With regard to the use of borrowed funds, it would be advisable to leave it to the Board of Governors to lay down credit policy.
Mr. ATTIGA (Libya) proposed the addition, at the end of Article 14(i)(c), of the phrase: " ... pro-vided that such investment is guaranteed by the Government in whose territory the investment is made". That procedure could be tried for five or ten years.
Mr. MAWALLA (Tanganyika) and Mr.
MOHAMED ALI (Somalia) felt that was asking too much of Governments unless they had some control, as in the case of a development corporation.
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Mr. TINOR (Central African Republic) pointed out that in the French-speaking countries, where State enterprise prevailed, there would be a pre-ference for Government guarantees.
Mr. RAMPARANY (Madagascar) felt that the Bank could in some cases ask for government guarantees, but it should study each case thoroughly.
He proposed a more llexibly-worded amendment to the effect that"dans des cas particuliers to Banque pourra demander des garanties au gouvernement interesse" .
Mr. MARZOUK (United Arab Republic) stressed that Governments were bound to be in-volved in such operations by the Bank. The guarantee of a minimum return was necessary.
In reply to a question from Mr. AKINRELE (Nigeria), Mr. ATTIGA (Libya) said that the guaran-tee he had in mind was not a specific return but an undertaking to repay the original investment in case of default or liquidation. There were two sides to the guarantee question: I) the financial side, to ensure a small minimum against losses; 2) the Bank's credit rating in world markets, which insistence on Government guarantee would enhance. He did not agree that a Government guarantee was too much to ask since investment by the Bank in their territor-ies was a matter of importance to all members.
The IFC did not insist on a Government guarantee, but the IDA did.
After a break/or private discussion, it was agreed that the original wording of Article 14 be maintained.
Article 15
Since some questions had been raised as to the meaning of the text of paragraph (I),
Mr. SINGER (Secretariat) suggested that the adoption of the amendment proposed by the IBRD would solve the problem.
Mr. AHMED (Sudan) felt that paragraph (I) restricted the borrowing power of the Bank too much; the policy should be more liberal.
Mr. ATTIGA (Libya) stressed that, as the Bank was to be a development bank and not a commercial bank, it had to be governed by different conditions.
A commercial bank had to have a specific amount of liquidity and a policy of lending short and borrow-ing long. But the ADB might have to borrow short and lend long; hence there should not be too much freedom of operation.
Mr. KWATENG (Ghana) said that his Govern-ment had originally limited the borrowing power of its National Investment Bank, but had since removed the restriction, since the funds it borrowed from abroad were in any case tied to specific pro-jects. It was free to borrow so long as the outside countries had confidence in it.
It was decided to refer Article ISto the Drafting Committee for redrafting.
Article 16
Mr. MAWALLA (Tanganyika) withdrew the second sentence of his proposed amendment to sub-paragraph (b) but maintained the proposal that the words "in exceptional circumstances" be deleted, since the local expenditure referred to ine-vitably gave rise to increased imports and an increased demand for foreign exchange.
Mr. MUKASA-SSENTONGO (Uganda), Mr.
ROBERTS (Zanzibar) and Mr. REES (Kenya) strongly endorsed that view.
Mr. MUKASA-SSENTONGO (Uganda) comm-ented that the Article rellected the disadvantage of all foreign aid, which linked help from the Bank to foreign exchange costs. He proposed that the last two lines of sub-paragraph (b) be replaced by: (the amount of such financing by the Bank) "bears a relation to such estimated increase in demand".
Mr. MARZOUK (United Arab Republic) stressed the importance of all countries mobilizing funds for local expenditure and Iimitiug consumption to the utmost. He favoured retaining "in exceptional circumstances. "
Mr. AHMED (Sudan) suggested the insertion or a further stipulation under (b); "Also if the in-creased demand for foreign exchange is likely to cause undue loss or strain on the recipient country's balance of payments."
The CHAIRMAN observed that it seemed acceptable to delete "in exceptional circumstances".
Article 16 was referred to the Drafting Com-mittee for amendment.
Article 17
The CHAIRMAN said that there seemed to be no contradictiou between Mr. REES' (Kenya) comment and paragraph (I) as it stood. The Tanganyika amendments to paragraph I (a) (i) and(j) seemed acceptable; the comment on sub-paragraph (c) was axiomatic. He drew attention to the IB RD comment on paragraph I (d).
Mr. MAWALLA (Tanganyika) thought the Kenya amendment very important in extending the scope of the Bank's operations. Owing to excessive project orientation, there had been serious misallocation of resources in East Africa. Assistance had been concentrated on graudiose development projects, whereas a series of small expenditures throughout a country, such as on feeder roads and agricultural extension, would lead to a higher rate of growth. The priorities had been those of inter-national organizations rather than those of the country's own advisers.
The CHAIRMAN commented that the problem was whether the Bank could adopt a global approach or deal only with specific projects. It would have to bear in mind the over-all programming concept.
Mr. MUKASA-SSENTONGO (Uganda) felt that the Articles as they stood did tend to stress the project approach, with loans tied to individual projects. What Kenya was advocating was develop-ment programme loans which the recipient Govern-ment could spend as it thought fit. There was a clear distinction between the two approaches. It was important for the Bank to do all it could to provide help which the countries could not get elsewhere and cover the gap in their development programmes.
If the members felt that the Bank should not be given carte blanche to assist development programmes, he would suggest the following compromise solution:
"The Bank may provide development pro-gramme loans or guarantees to members provided:
(I) That the total amount outstanding in respect of such development programme loans and guarantees does not exceed one-third of the Bank's unimpaired subscribed capital together with the unimpaired reserves and surplus in its ordinary capital resources, and
(2) That such development programme loans and guarantees do not constitute more than one-third of the total amount of direct loans and guarantees provided to an individual member."
Mr. REES (Kenya), while agreeing with the Chairman that in theory it should be possible to assess projects within the concept of an over-all plan, pointed out that a development programme might consist of a number of small projects none of which would be of particular interest to the Bank;
hence they were in danger of being left out. More-over, the project approach imposed restrictions;
the Bank might insist on amendments to them which would upset the balace of the programmes.
In cannexion with the Ugandan amendment, the provisions of Article 16 would have to be borne in mind. The second part of paragraph (I) (a) (i), "They may, however", together with the Tanganyikan amendment to it, might well give sufficient flexibility.
Mr. ATTIGA (Libya) wondered whether the point could be met by repJacing, in the same sentence, the word "projects" by the words "development programmes" (of a specified type).
Mr. ROBERTS (Zanzibar) iIlustrated Kenya's point by referring to a typical $ 15.000 programme for mechanical cultivation in Zanzibar. It was un-likely that the Bank would find it feasible to process such a small scale scheme; such schemes needed to be grouped and channelled via a domestic develop-ment bank with an ADB loan.
Mr. MARZOlJK (United Arab Republic), while supporting the idea of development programme loans, suggested that it might often be easier and faster to ask for loans for specific projects within a programme and not wait until the whole programme had been elaborated.
Mr. SINGER (Secretariat) warned that if carte blanche was given to make general global loans,
the suspicion might be created that this might even be extended to budget deficits. He suggested, to meet the preoccupations, the following change in paragraph I (a) (i): "The operations ... financing of specific projects or groups of projects, particularly those forming part of an over-all development pro-gramme".
Some represeiltatives queried the intention of the IBRD amendment to Article 17(I)(d). Itwas pointed out that it was simply a warning as to the paragraph's implications
Mr. MOALLA (Tunisia) suggested that the paragraph be deleted, leaving the matter within the competence of the Board of Directors.
The CHAIRMAN suggested that the Drafting Committee should reword paragraph 17 (1)(d) so as to give the Board of Directors power to negotiate with any group it desired and adopt the appropriate policies.
Article 17 was approved.
Article 18
Article J8 was adopted.
Article 19
Mr. MAWALLA (Tanganyika), supported by Mr. MUKASA-SSENTONGO (Uganda), felt that there should be only One charge and that it should be of ~~ per cent. He commented that there was no reference to a commitment charge.
Mr. MOALLA (Tunisia) said that the Com-mittee of Nine had not laid down a figure of I per cent; that feIl within the functions of the Bank's management.
Mr. MANGASHA (Ethiopia), supported by Mr. ATTIGA (Libya), stressed that the Article fixed only a minimum. Ifthe Bank could not recoup funds through that kind of charge, its credit worthi-ness would be affected. The amount might be reduced later, but resources should not be diluted initially.
Mr. MORGAN (Liberia) stressed that the Board of Governors would be able to review the position from time to time.
Mr. ELKIN (Secretariat) in reply to a question from Mr. MlJKASA-SSENTONGO (Uganda) said that the fees were cumulative in the World Bank.
He stressed that the commission was only charged on the amount olltstanding.
Article 20
Mr. MARZOUK (United Arab Republic) and Mr. MOALLA (Tunisia) questioned the advisa-bility of stipulating that the special reserve should be held "in liquid formH .
Mr. ATTlGA (Libya) commented that there might weIl be a need for a special liquid reserve.
The Board of Directors could appropriately decide on its form.
The meeting rose at 1.45 p.m.
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SUMMARY RECORD OF THE SIXTH SESSION